Is It Wise To Get A Home Equity Loan?

It depends on several things: the purpose of the loan, its terms, your finances and money habits, the amount of the loan, and many more. We will discuss the ones mentioned one by one, but let us first get a grasp of what a home equity loan.

What is Home Equity Loan?

A home equity loan or HEL and also known as second mortgage, is a kind of loan that homeowners can obtain by using the equity in home as collateral. Since its cost is cheaper than when borrowing using credit cards, many homeowners find great use for such kind of loan to fund substantial expenses, like college education, home repairs, and medical bills. The great thing about it is that its interest rates are often lower than credit cards and consumer loans, and the interest is tax deductible. However, this kind of loan produces a lien against the property of the borrower and brings down home equity. You may be thinking if its benefits outweigh its drawbacks. As what I have said early on in this post, it depends. Let us look at some of the factors.

Should You Get A Home Equity Loan?

Purpose of the Home Equity Loan

If you or a member of the family have been stricken by a sickness and you need extra funds to cover for the medical bills, then taking on a home equity loan may be reasonable. Of course, the health of anyone in the family is more important than even your house. In contrast, do not put your home at risk just to be able to indulge on pricey but inessential luxury, such as to go on an expensive vacation.

A home equity loan may be used to finance other similar important or necessary, expenses, such as for a college education. However, you must also factor in your age when borrowing to pay for your kid’s tuition using a home equity loan. If retirement is just around the corner, this loan may have an impact on your capacity to achieve your financial goals, hence, it may be best to consider other types of financing.

Terms of the Home Equity Loan

Before signing any contract for the loan, make sure that you understand the terms. Know that there are two kinds of home equity loan: fixed rate and the home equity lines of credit (or HELOC). Fixed rate loans are suitable to pay for one large expense, such as replacing the HVAC for your home and interest rate remains the same all throughout. HELOC is suited for short-term recurring expenses, such as the quarterly tuition of your college student. However, you must realize that the rate here could fluctuate. Check interest rate and ensure that this is lower than if you obtain another type of loan.

Your Finances

It is understandable that you are considering a loan to get you out of a little financial tight spot. However, think long-term. Assess your financial state before you borrow using your home as a collateral to determine if you have the means to make the payments without jeopardizing your budget for other basic expenses and other bills. It would be best if you are financially capable of repaying the loan on or before the due date. In other words, you must have a stable and dependable source of income. However, if your finances follow an unbroken spending and borrowing pattern, getting this type of loan may just only bury you deeper in debt, or worse, it may lead you to lose your home.

Amount of the Loan Vis-a-Vis Your Home’s Worth

A number of borrowers, especially those who are held captive in the spending and borrowing cycle, fall into the trap of taking a loan that is worth 125 percent of their home equity to pay for other debts and other expenses. This is a bad idea especially because this often entails a higher interest rate and the house, as a collateral, is not sufficient to secure the loan since you will be taking out more money than what your property is worth. Additionally, the interest you pay for that part of the loan that is beyond your home’s worth is not tax deductible. Before taking this route, be careful as this could be an express lane that can take you to Bankruptcy Avenue.

So before obtaining a home equity loan, make sure that you are financially capable of repaying it, you will be using the loan for an important expense, and you understand the its terms.

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